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Where Next for International Corporate Tax?

In recent years the corporate tax policy landscape has been in almost constant flux. But even relative to that benchmark, early 2019 been characterised by some very significant movements, which may well lay the groundwork for fundamental shifts ahead. For businesses committed to responsible tax policies and practice, these developments are likely to shape the corporate tax landscape in important ways.

The atmospherics around global tax reform are noteworthy. Scrutiny from media, public and political entities around corporate tax affairs is nothing new, but has intensified with a particular focus on the tech giants. It wasn’t a surprise to many that tax was so prominent at Davos this year. And with both US and European governments talking openly about significant global tax reform and minimum taxes for multinationals, it’s clear that change is afoot. What that change looks like, however, remains unclear.

When it comes to those shaping these shifts, we’ve already seen significant movement from several international institutions this year. In March 2019, the OECD published an interim report on the ‘Tax Challenges Arising from Digitalisation’. The report forms part of a process aimed at addressing a gap in the earlier ‘Base Erosion and Profit Shifting’ (BEPS) process. BEPS did not provide an adequate solution to the potential misalignment between the location where corporate economic activity takes place and where the profits arising from that activity are ultimately taxed. Such misalignment can apply to all multinational companies, but the risks are particularly acute amongst technology-driven companies, whose assets are seldom physical or tangible.

Due to these circumstances, campaigners are increasingly in favour of reforms that would allocate profits at a group rather than subsidiary level, with an agreed formula distributing the subsequent taxing rights between jurisdictions, based on some indicator of economic activity (e.g. number of employees).

The report was explicit about this, reaffirming the OECD’s recently announced openness to consider “proposals [that] would lead to solutions that go beyond the arm’s length principle.” The arm’s length principle is the basis by which companies price internal transactions—and can thus seek to reduce their tax liabilities. For the better part of a century has underpinned the tax affairs of multinationals, so the OECD’s report is significant: it opens up a discussion that has been largely closed since the 1930s.

The IMF has also weighed into the debate with its own report, likewise focused on the taxation of digital business. In an accompanying Financial Times op-ed, IMF chief Christine Lagarde called for “a fundamental re-think on international taxation,” highlighting not only the issues around digitalisation, but also tax competition and the failure of the BEPS process to adequately incorporate or reflect the views and priorities of developing countries.

To many, Lagarde’s comments appear to be a play for greater IMF leadership on tax, and a challenge to the OECD, which for years has been criticised as unfairly representing the interests of advanced economies despite its ‘Inclusive Framework’ now representing a majority of developing countries. But the IMF’s contribution here is worth noting.

A third development may present another path with the European Parliament adopted a new ‘tax roadmap’. In addition to criticising seven EU members states as displaying the traits of tax havens, the roadmap recommends a new global tax body within the UN. The UN has long been the preferred host organisation for such a body from the perspective of tax campaigners and NGOs, including those seeking to emphasise the links between tax and related development issues, such as gender equality and human rights. But there is also concern that the UN doesn’t have the requisite expertise to lead on tax.

Among the OECD, IMF and UN, there appears therefore increased jockeying regarding roles and leadership in future global tax reform making it increasingly apparent that global efforts to forge a more coherent way forward are needed.

Many businesses wish to contribute to the development of a fairer, more sustainable global tax system, but a backdrop of uncertainty makes this more difficult. Cooperation and coordination between different international bodies is vital. Coalitions like the Platform for Collaboration on Tax—which was established to promote better coordination across the OECD, UN, IMF and World Bank—have an important role to play.

But businesses themselves can also take action. The tax policy landscape is in constant flux but the fundamental question on the minds of a majority remains consistent: are companies paying a ‘fair share’? It’s a question steeped in subjectivity and value judgements and seldom is there a straightforward answer. Businesses can address it by ensuring that a strong and robust set of tax principles informs their strategy, policy and practice. They can also report more on their tax payments to governments. One of the best known corporate reporting standard setters, the Global Reporting Initiative, recently set out to establish a new tax reporting standard to promote just such greater transparency.

With corporate taxation remaining so contentious, it is more imperative than ever for companies to proactively demonstrate that they’re adopting a responsible approach. That’s where The B Team Responsible Tax Principles come in. Since launching a year ago, the Principles have gained recognition as an ambitious but important behavioural standard. Many B Team Leaders have spoken out on the need for further action and there have been further company endorsements. We know there is more to do, so we’re renewing our ambition and redoubling our efforts.

Corporate tax and the global tax system in which they are situated will remain in the limelight for the foreseeable future, with many important debates and decisions ahead. Given recent developments, it’s clear that a multitude of actors are jostling to lead the way. While there is no clear path ahead, we hope and expect it should be a race to the top, with the OECD, IMF and UN all contributing in some way—and responsible businesses cannot sit on the sideline. Those wishing to make their own contribution to a better, fairer and more sustainable tax system will have to lead by example. The B Team Responsible Tax Principles can provide the blueprint they need.